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B. Krishnakumar

Mr. Brijmohan Lal Munjal, Chairman and Mr Pawan Munjal, MD... Hero Honda's position of strength could be challenged by enhanced competition. — Kamal Narang.

MOTORCYCLE major — Hero Honda — has reported improved performance for the quarter ended September 2004. The turnover rose 39 per cent to Rs 1,757.2 crore and the post-tax earnings 24 per cent to Rs 194.36 crore. The growth in turnover was driven by a robust 37 per cent rev up in motorcycle sales volume.

The company sold 6.2 lakh units in the September quarter compared to 4.5 lakh units in the corresponding previous period. The shift in the product matrix towards higher value products explains the 39 per cent growth in turnover and a marginally lower volume growth of 37 per cent.

The increased offtake of the executive segment bikes — Passion Plus — and the entry-level motorcycle — CD Dawn — has pushed volume growth. Interestingly, the company has also fared reasonably well in the upper end of the price spectrum. The launch of refurbished models of Ambition and CBZ appears to have helped Hero Honda record improved sales volume in the top end of the price segment.

The rising trend across all key inputs, coupled with increased outgo towards sales promotion, a discount offer of Rs.1001 and staff cost, pulled down the profitability of the company. The operating profit margin dropped to 17.6 per cent from 19.1 per cent. The erosion in profitability and the increased taxation provision affected the bottomline growth.

The growth in volume and profitability would be under pressure in the following quarters of this fiscal. The growing competitive pressure in the motorcycle arena would be the key factor that could affect Hero Honda's performance.

Being the market leader, the growth rates achieved by the competitors would invariably be at Hero Honda's expense unless the overall market per se grows at a fair clip. The launch of CT 100 model by Bajaj in the entry-level segment is likely to impact Hero Honda's CD-Dawn model. The launch of TVS Motor's model — Star — targeted at the entry-level segment would only add to the competitive pressure.

Besides, in the executive segment, competition is getting stiffer with the launch of models by competitors. TVS Motor and Yamaha have launched 125 cc bikes. Bajaj also recently launched a model, Discover, in this product category. Hero Honda does not, however, have a presence in this segment. Though it has the 135 CC Ambition model, this model has enjoyed limited success.

The entry of the much-awaited Honda Motorcycle and Scooters into the motorcycle market is another factor that could have implications for existing players, including Hero Honda.

Unlike the competitors, Hero Honda will be entering the festive season without any new model offering. Two-wheeler sales typically peak during the festival season that coincides with the October-December quarter. Though Hero Honda plans to launch its 125 cc version shortly, the success of this product could turn out to be crucial for the company.

While the volume growth is likely to be under pressure because of these factors, the profitability is also likely to be strained owing to variety of reasons. The growing competitive pressure, the rising trend in input costs and the aggressive promotional schemes offered by the company could eat into the margins.

After the discount scheme of Rs 1,001 for its popular models, Hero Honda is now offering mobile phone with connection along with new bikes purchased.

The advertisement outgo would have to be stepped up when the company comes up with a new model. Given these factors, Hero Honda profitability is likely to be under pressure.

Taking into account these aspects and the uncertainty relating to the ability of the company to sustain growth rates, shareholders may look for opportunities to reduce exposure.

Fresh buying can be considered if the company's new models succeed.

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